Aetna Hits 52- Week High on Positive Industry Developments - Analyst Blog

On Mar 19, 2015, health insurer Aetna Inc.AET surged to a 52-week high of $108.97. The rise was propelled by industry-wide developments which include a statement by the U.S. Department of Health & Human Services (HHS) in ongoing Supreme Court case, reports from Obama administration stating an increase in enrollment, and the reimbursement rate proposal from the Centers for Medicare & Medicaid Services (CMS) for Medicare Advantage (MA) insurance.

About 2.4 million shares exchanged hands in the last trading session. Over the past one year, the stock gained 46.5%, significantly higher than the S&P 500's increase of 12.2% in the same time frame.

Growth Drivers

Shares of the company also hit a 52-week high on Mar 16, when the HHS said that it is trying out ways to counter the case challenging the validity of the subsidies that were given to the enrollees who sought coverage on the federal exchange. The opponents of the health care law challenged the text of the law saying that those who have received subsidies via the federal exchange were not qualified to receive the same and that subsidies should have been given only if the enrollments were made through state-based exchanges. The case which was challenged by the opponents last November made health insurers jittery.

A ruling in favor of the opponents would mean axing of subsidies, making health insurance expensive and required only by people with acute necessity (elderly or diseased). This would make the composition of members unattractive for the health insurers and expose them to high claims' risk.

Aetna and other health insurers - UnitedHealth Group Inc. UNH , Humana Inc. HUM , Cigna Corp. CI , Anthem Inc. ANTM - breathed a sigh of relief when the HHS said last week that it will urge states to say that they are subcontracting the management of an insurance exchange to HHS, thereby 'establishing' an exchange as per the law. This would mean that though health insurance is being bought by the federal exchange, it is just acting as an agent on behalf of the states. Hence, this would amount to buying a policy via the state exchange. This will in turn make the subsidies given earlier seem valid.

If the Supreme Court accepts this plea, the case can turn in favor and keep federal subsidies intact, making subsidized insurance attractive for customers and increasing enrollment for insurers.

Shares of the company also got a boost when the Obama administration announced that the ACA has been successful since the uninsured rate has fallen to 13.2% from 20.3% two years ago. A decline in uninsured rate means surging enrollment or higher membership for major players - Aetna being one amongst them. The company's membership increased to 58.2 million from 53.7 million in 2014. This increase is largely a result of Obamacare expansion. The insurers who were once fervent critics of the law are now its supporters, as the law has been a net positive for them.

Another positive industry development that helped the stock surge was last month's proposal from Centers for Medicare & Medicaid Services (CMS) for Medicare Advantage (MA) insurance reduction of 0.95% for 2016, which was less onerous that originally feared. Despite the reimbursement rate cut, the players, including Aetna, are expected to see a net revenue gain from the MA line of business on account of the huge volume growth as baby boomers retire in huge numbers and demand MA insurance. Aetna has made huge investments in the MA business and expects higher underwriting margin in MA, provided the CMS reimbursement cut proves less regressive.

Factors internal to the company that impressed investors are its ongoing drive to contain medical cost and provide value-based service to its members by forming Accountable Care Organizations (ACOs). Yesterday, the company formed another ACO with HackensackAlliance ACO. The company is witnessing positive cost and quality outcomes from its ACO program.

On the earnings front, this heath insurer reported fourth-quarter earnings of $1.22 per share in line with the Zacks Consensus Estimate and full-year earnings of $6.70, surpassing the Zacks Consensus Estimate by a penny.

Aetna carries a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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